Cases clarify duty of good faith contractual performance


Joel Berkovitz Head Shot

Several recent cases help spell out the duty of good faith contractual performance that exists in contract law, Toronto business lawyer Joel Berkovitz tells The Lawyer’s Daily.

In this case, for example, the Supreme Court of Canada “recognized that a duty of good faith contractual performance exists as a general organizing principle of the common law of contract,” writes Berkovitz, a lawyer with Shibley Righton LLP.

And two recent Ontario Court of Appeal (OCA) cases “interpreted this duty in the context of lending relationships and the termination of fixed-term service contracts,” he says.

In this case, writes Berkovitz, the OCA “considered whether a lender was obligated to continue providing overdraft lending to a borrower, given a history of such lending.”

The plaintiff was a commercial client of the defendant bank, he explains.

“Its nursery business was seasonal, and so during its busy season it routinely requested to borrow above the maximum amount of its line of credit so that it had the working capital it needed. [The bank] granted these requests for several years. However, in 2007 [the nursery] did not repay in full the additional amount which it borrowed, and in 2008, when [the company] again sought to borrow additional funds … above its credit line, [the bank] refused to provide the funding,” says Berkovitz.

The company sued, claiming the bank “had breached the duty of good faith contractual performance by refusing to advance the additional funds,” he says.

The OCA upheld the trial court decision in the bank’s favour, writes Berkovitz, “and found that it had not breached its duty of good faith contractual performance. While this duty required a bank to give its customer a notice if there was a change in the ‘prevailing course of lending conduct between the parties’ with respect to overdraft lending, the court found that, in this case, it was [the nursery] which had changed the prevailing course of conduct by failing to repay its 2007 overdraft in full as it had in previous years.”

Citing the Supreme Court decision, the court “reiterated that the duty of good faith contractual performance does not require a party to forgo advantages flowing from a contract or impose a general duty on a party to subordinate its interests to that of the other party,” he says.

In the nursery’s case, the court found that the bank exercised “rights afforded to it under its contract with [the nursery], and was under no obligation to advance further funds … if this was contrary to [the bank’s] interests.”

In a more recent case, says Berkovitz, the OCA “considered whether the duty of good faith contractual performance required a party to provide notice of termination earlier than required by its contract, when it knew well in advance that it intended to end the contractual relationship.”

The plaintiff in the matter provided maintenance services to 10 condominiums under separate seasonal contracts.

The winter contract allowed the condominiums to terminate it on only 10 days’ notice, says Berkovitz. Because of performance issues during the first winter, the condominium decided to terminate the contract, but they decided to wait to tell them so that the summer work wouldn’t be affected.

“When the condominiums eventually terminated the winter contract,” he says, the company “sued and claimed they had acted in bad faith by withholding the fact that they intended to terminate the winter contract and by representing that the winter contract was not in danger of non-renewal.”

At trial, says Berkovitz, the judge “found that the minimum standard of honesty would have required the condominiums to address the alleged performance issues … and provide prompt notice, or refrain from any representations in anticipation of the termination notice period.”

He says the condo appealed and the OCA overturned the trial judge’s decision.

“While the court found that the condominiums may have failed to act honourably, they had not breached the duty of good faith contractual performance,” he explains.

“Significantly, the court found that there is no unilateral duty to disclose information relevant to termination. All [the company] was entitled to was 10 days’ notice of termination as per the contract. While [the plaintiffs] may have been hopeful for a renewal and a new contract, the duty of good faith performance did not limit the condominiums’ freedom regarding future contracts which had not yet been negotiated or entered into.”

Berkovitz says the duties imposed by the trial judge “went beyond what the duty of good faith performance required.”

In the first case cited above, the Supreme Court “emphasized that its recognition of a duty of good faith contractual performance was a modest, incremental step, and that it was not to be applied to undermine long-standing principles of contract law and create commercial uncertainty,” writes Berkovitz, adding that subsequent decisions “affirm the limits of the duty’s application.

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